How To Protect Your Small Business During a Divorce

Divorce is stressful. Operating a business, especially in a challenging economy, is stressful. Add the two together and that stress can reach a whole different level. If you're a small business owner going through a separation or divorce, we will discuss some of the challenges that you might face, and some simple steps you can take to keep the end of your marriage from also becoming the end of your business.

Nothing contained in this article should be construed as legal advice. I am a California family law attorney and my law practice is limited to divorce and family law in California. However, since every factual situation is unique, consultation with an experienced family law attorney in your state is very important before you make any decisions regarding separation, divorce, and how to handle your assets, including your small business.

What are your state's laws? The first and most important step you must take if you are a small business owner is to determine what the laws of your state are regarding the valuation and division of a business during a divorce. Consultation with an experienced divorce attorney is an important part of this process, but as we will discuss below, the need for outside experts, such as forensic accountants, may also become necessary.

Who will operate the business during the divorce? Who operated the business during the marriage? If the answer is both you and your spouse, the business's operation during the divorce is an issue that may need immediate attention.

Can you two get along to the point where you and your spouse can put the business's interests above each of your own and ensure its efficiency and profitability? If the answer to that question is yes, then you should consider whether a clear division of responsibilities and duties between the two of you is a good idea, and you may want to look at this issue before filing for divorce or shortly thereafter.

As you may have learned during the marriage, and as a business owner, misunderstandings and miscommunication can cause a lot of problems and waste time and money. Each of you should have independent legal counsel during the process if you're going to prepare an agreement on how the business will be operated while the divorce is pending.

If you and your spouse cannot come to an agreement regarding how to operate the business, court intervention may be necessary. However, this is where you need to be careful, and you should consider discussing the following questions with your lawyer and CPA:

• What impact will the court intervention have on existing employees, and could you potentially lose them if they do not want to be involved or get in the middle of your divorce and disputes?
• Can you or your spouse do the other one's job and your own, or is it possible to hire another person to perform the duties of the spouse you no longer want involved in the business? Sometimes, a business cannot operate without the presence of the owner. Other businesses run just fine and a co-owner or operator can be easily replaced.
• Have you laid out a plan for the type of accounting you may need to provide to your spouse, or your spouse may need to provide to you, depending on who obtains the right to at least temporarily operate the day-to-day of the business while the divorce is pending?

These are just a few starting questions that you should ask yourself and and for which you should seek answers. As you reveal the details of your business operation and history to an experienced divorce attorney and forensic accountant, additional questions and concerns may come up that will need to be addressed before you proceed to court.

What about professional practices? Businesses that are professional practices such as law firms, medical or accounting offices, and other entities operated by professionally licensed owners rarely have the opportunity for a dual spouse operation. Generally, the spouse who possesses the license is the one who is operating the business, and special challenges arise when the other spouse serves in the capacity of a manager or administrator. Special attention should be taken to ensure that you do not inadvertently run afoul of the rules and regulations that govern your license, which includes avoiding sabotage by your spouse of your clients or in-house accounting.

Have you considered the impact of spousal support on your small business’s bottom line? If you live in a state where you will likely end up paying spousal support while the divorce is pending, and even after it has concluded, you should consider what impact that may have on both your bottom line as well as the buyout you can pay. Speaking with a divorce lawyer as well as a CPA about such issues can help you plan out how much of a buyout you can afford and the terms of the buyout going forward, especially in light of potential spousal support payments.

Have you hired a forensic accountant to conduct a business valuation? Even small businesses are not immune from needing valuations by forensic accountants from time to time. If your small business is one that has a simple financial structure, a competent forensic accountant can look at your financial records and determine what value and goodwill, if any, your business has.

If you're able to determine the value of your business before you file for divorce, it may help you plan out your strategy and budget to put you in a better position to make settlement offers if you and your spouse have already exchanged the necessary documentation and are on the same page regarding issues and dollar amounts.

Is your small business worth the fight? Not every small business is worth spending tens and possibly hundreds of thousands of dollars in a divorce case. Early planning and preparation will help you understand what you're really fighting for and what your potential best case and worst-case scenarios are.

For example, if through a forensic accounting and due diligence with your divorce lawyer you determine that the business only has a value of $50,000, and that is close to your worst-case scenario at a trial, does it really make sense to spend more than that in a fight with your spouse? Probably not, right?

You may want to consider whether mediation, collaborative divorce (in states where such a process is used), or even early settlement offers make sense so your spouse can see for him or herself what the business really is worth. Exploring other options to resolve the case, or if your spouse is willing and able to operate the business and buy you out, should at least enter the dialogue between you, your spouse, and your respective retained professionals.

Ultimately, good representation, good accounting, and due diligence can go a long way.